Question

Part I. Under what conditions is the production possibilities frontier linear rather than bowed out Explain how absolute advantage and comparative advantage differ. Draw a production possibilities frontier for a society that produces food and clothing. Show an efficient point, an inefficient point, and an infeasible point. Show the effects of a drought. Define microeconomics and macroeconomics Which of the following questions is studied in microeconomics? a. Should I go to college or get a job after I graduate? b. What government policies should be adopted to promote employment in the 1. posiblities fonto 3. 4. 5. c. d. e. economy? How many people are employed in the economy this year? Has the overall level of prices in the economy increased or decreased this year? What determines the overall salary levels paid to workers in a given year?

Answer 1

1. A production possibility Frontier (PPF) is a graphical representation of various combinations of units of two goods that can be produced with given resources.

Most often, PPF curves are bowed out but could be straight line as well. The shape of a PPF curve depends upon the substitution rate. IT is the rate at which more of one goods can be produced by giving some of the other units. If PPF is straight line, it implies constant opportunity cost / substitution rate. In other words, when at all level same units of a good has to be trade off to produce one unit of other, the opportunity cost is constant. For example, if producing 1 more unit of good X requires leaving production of 2 units of good Y, then producing one more unit of X will again require leaving production of 2 units of Y. This is constant opportunity cost.

Whereas, under bowed out PPF, opportunity cost increases as one go from left to right over the curve.

Thus, the condition where the opportunity cost is constant, PPF is straight line not bowed out.